THE WELFARE COST OF NOMINAL WAGE CONTRACTING

We use a dynamic general equilibrium model to obtain quantitative esti mates of the welfare cost of nominal wage contracting. We find that th e welfare cost of such contracts can vary quite a lot depending on the degree of indexation, the size and persistence of monetary shocks and the contract length. The size and persistence of technology shocks do not affect the welfare cost significantly. The elasticity of labour s upply is important for the welfare cost. If the labour supply elastici ty is small the welfare cost of nominal wage contracts can be substant ial.